Sheng Siong Group’s 12M18 operating margins settled at 9.4% (vs. FY17: 9.9%) subdued by higher administrative expenses on account of the higher number of new stores (record ten new store openings in FY18).

Singapore revenue growth on new stores; China at early stages

Sheng Siong Group guided that since the beginning of 2019, of the 6 HDB shops that were previously won by competitors via online bidding in FY17-18, 3 have yet to be re-tendered. Besides that, HDB slates 9 more scheduled bids in FY19F (5 in the next 6 months). This bodes well for new store pipeline.

Beyond that, FY19F revenue would see the impact of the 10 stores that came onstream in FY18. This could counterweigh the potentially weak same-stores sales rate in FY19F (on account of slower macro growth).

A second China store lease was signed and could be operational in 3Q19F. Compared to Sheng Siong Group’s Singapore operations, China remains in the early stages.

Maintain ADD, preferred supermarket pick

We cut our FY19-20F net profit forecasts marginally on lower revenue per square feet in light of the uninspiring retail index growth and slightly higher SG&A costs in FY19F. But we still like Sheng Siong Group for its defensive stance in the supermarket space, strong GPMs and healthy balance sheet (end-4Q18 net cash position of S$87.2m with zero borrowings).

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